Stabilization and adjustment in Argentina

-3 NUMBER 69 *ED Precis Operations Evaluation Department June 1994 Stabilization and Adjustment in Argentina Two trade policy loans were the cor- would eventually resolve fiscal imbal- istration, and reforms in public enter- nerstone of the Bank's assistance to Ar- ances, the Bank supported reforms in prise tariff policy. Through this loan gentina during the turbulent period agriculture, trade, and financial deregu- the Bank secured agreement with 1986-90. The second loan, approved in lation. Its first Trade Policy and Export Argentina on short-term monitorable 1988, was risky and controversial in the Diversification Loan (TPL1, for $500 macroeconomic targets. absence of an IMF-assisted stabilization million), approved in May 1987, sup- 9 A banking sector loan (BSL, program. The loan supplied fiscal and ported export development and liberal- $400 million) to help finance the new balance of payments support, not only to ization in the context of the Plan Austral. investment opportunities that were promote trade reform but also to help But Argentina's deep-seated fiscal prob- expected to arise as a result of the with the rescheduling of external debt. It lems were not adequately addressed; trade reform. This loan was never also provided the context for the Bank to even though the government complied signed because the macroeconomic monitor macroeconomic performance. An with the conditions for TPLI, by 1989 conditions needed to comply with OED audit* notes that through making fiscal problems were to lead to reversals the loan objectives were not realized. the most of its long-term relationship in trade policy. The outcome of TPL1 e Loans for housing and electric with a client, the Bank helped lay the ba- was evaluated as unsatisfactory. power. sisfor Argentina's later economic revival. In the first half of 1988 the economic The decision to lend was highly con- The depression of the 1930s and and social situation worsened steadily. troversial. TPLI, approved 17 months the consequent loss of export markets Government revenues went on falling earlier under more favorable circum- led Argentina to isolate itself from the as inflation accelerated. Austerity mea- stances, had not led to sustained policy rest of the world and promote import- sures failed to restore private sector con- improvement. Argentina's credibility substituting industrialization and an fidence. There were major strikes and for implementing reform remained as ever-growing role for the state. In time, the threat of a military coup. In March, low as ever, and this time, no lW- this strategy resulted in massive misal- Argentina stopped paying interest to its assisted stabilization program was in location of resources, slow economic exteral commercial creditors, and the place. The government's political growth, an unsustainable fiscal deficit, stabilization effort was abandoned. power was waning. But there was and accelerating inflation. Poorly de- strong inclination to give reform a last signed economic reforms of the late A calculated risk chance to succeed. The Bank felt it had 1970s were abandoned. a good understanding of the origins of In August 1988 the government an- the fiscal problems, and hence of the The Alfonsin administration (1983- nounced a last-ditch stabilization ef- types of measures needed to address 89) made efforts at stabilization and re- fort-the Plan Primavera. The Bank in- them. Nevertheless, in view of the ex- form-including some freeing of trade. tensified its dialogue on reform and its But the government was reluctant to analysis of Argentina's economy. In Oc- tackle the fiscal deficit, and the efforts tober 1988 it approved a $1.25 billion rgetforde Audi REport achieved very little. loan package: Are ctin oan Exort Support for Plan Austral A second trade policy loan (TPL2 tr Loan, and Second Trade Policy $300 million) which sought to broaden Loan,. Report No. 132213, June The main goal of the Plan Austral, the trade reforms started under TPLL 1994. OED repoi ts are LWailable to introduced in June 1985, was macroeco- with a primary focus on import liberal- Bn thecItira Due nt n.staff nomic stabilization, progress toward ization. TPL2 incorporated fiscal mea- aro t onal DoIurnti Snit which was monitored by the IF. As- sures, including reform of the value- a nri suming that a restoration of growth added tax, improvements in tax admin- and eonoic recovery, poverty levels Macroeconomic indicators, 1986-92 appear to have been reduced as employ- __________________ _______ment has grown. The economy has con- 1986 1987 1988 1989 1990 1991 1992 1 tinued to open up, and GDP has recov- ___________ ________ - ered strongly. (See table.) GDP(index. 1986=100) 100 103 101 94 94 103 112 As 'o of real GDP Lessons Consumption S1 80 78 79 79 82 83 Investment 17 19 19 lb 14 lb 20 Long-term relationship: TheBank's Exports 8 8 9 11 13 10 10 assistancetoArgentinatumedsuccessful Imports 6 7 h 6 6 8 13 largelybecauseoftheunexpectedly Public deficit as strong reforms pursued by the Menem of current GDP -6 -10 -10 -11 -h -2 2 administration.Onaverage,such gambles are unlikely to succeed. The Inflation C"<. per year) 90 131 343 3,079 2,314 172 25 importantlessonisthattheBankand Argentina made the most of the type of permanent relationship that the Bank treme risks involved, the loan package value-added tax, modernizing the tax seeks with all its client countries. The was designed so that disbursements administration, and privatizing public Bank took care to limit its exposure, did would be limited to $150 million (the enterprises, notably telecommunica- thorough analysis of the country's prob- first tranche of TPL2) if the Plan tions and the airlines. Major progress lems, and was ready with policy advice Primavera failed. was made in trade policy; for fiscal rea- and a large lending program when the sons, export taxes remained, but im- opportunity arose. Under TPL2, several import liberal- port liberalization more than compen- e Needfor in-depth economic work: At the ization measures were implemented sated for them. Reforms accelerated time of TPLI, the Bank felt that it was ap- late in 1988 and inflation abated. The greatly in all areas, including trade, fis- propriate to proceed with trade reform first tranche of TPL2 was fully dis- cal, public enterprise, and monetary re- before the economy had stabilized, so bursed by January 1989. forms, and in July 1990, the Bank re- long as progress was being made toward leased the second tranche of TPL2. stabilization. With hindsight, this se- But, lacking popular support, the quencmg was wrong, because the fiscal Plan Primavera collapsed in the follow- Impact constraints remained, and subsequently ing month. The economy went into led to trade policy reversals. hyperinflation. In April 1989, a new The impact of the trade policy across-the-board export tax and the re- loans is difficult to distinguish from For some time, Argentina's fiscal introduction of import restrictions un- that of other reforms, especially problems were seen as largely due to did some of the progress with trade lib- because the trade reforms were poor demand management. The Bank eralization. Inflation peaked at more delayed until the other reforms were began in-depth economic work on these than 200 percent a month in July, the already being implemented. Most problems during the disbursement of month when a new government under sectoral measures agreed to under the TPLl. By the time TPL2 was approved, President Menem took office. loans were implemented but the con- the Bank had a better understanding tinuing failure to reduce the budget of the roles played by a poor tax struc- By July 1989, traumatized by deficit made progress toward the over- ture, weak tax administration, excessive hyperinflation and the long recession, all goals difficult. employment, and massive subsidies voters gave the new government the to the provinces and to inefficient mandate for fundamental reform that Major new investments in public enterprises. had eluded the previous administra- tradeables have yet to materialize. Ex- tion. The Bank's continued involvement port growth stopped after an initial re- Borrower "ownership" of reform pro- helped establish confidence, among a covery, partly because of the renewed grams: Full political comnitnent is vital broad spectrum of interested parties, in appreciation of the peso, and partly be- to successful economic reform. This was its analyses and proposed remedies. cause of renewed domestic demand. achieved only after Argentine voters saw that there was no altemnative to reformn. Economic policy making took on a Poverty, which had been rising for a - Bank-IAV roles: After the Argentina new sense of purpose. Fiscal reforms number of years, worsened during experience, the two agencies took steps included broadening the base of the 1986-90. With the subsequent reforms to clarify their respective roles. 0Ea Prpis is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. Please address comments and enquiries to the managing editor, Rachel Weaving, G-7137, World Bank, telephone 473-1719. ii t 1994